The SEC Expands the Pool of Smaller Reporting Companies

The SEC has greatly expanded the number of public companies that can take advantage of the “scaled disclosure” provisions of Regulation S-K. Under these rules, smaller reporting companies have less onerous requirements that apply to their periodic filings. For example, smaller reporting companies do not need to include the lengthy Compensation Discussion and Analysis disclosure that larger companies do. Following the SEC’s recent action, the definition of “smaller reporting company” includes registrants with a public float of less than $250 million (up from $75 million), as well as registrants with annual revenues of less than $100 million for the previous year and either no public float or a public float of less than $700 million (previously, less than $50 million of annual revenues with no public float).

In one sense, the scaled disclosure rules seem to have it backwards. The largest public companies, which must make the most disclosure, are the companies that we read about in the business press, that have their holdings by well-known institutional investors disclosed publicly, etc. In other words, these companies are already subject to plenty of scrutiny from participants in the investment world, and yet we also ask them to disclose everything that the SEC has ever thought to ask for. Meanwhile, smaller public companies, which are not discussed by third parties in public forums except for thoroughly unreliable sources like online message boards, are allowed to disclose less than their larger brethren.

However, there is another consideration that explains the SEC’s thinking on scaled disclosure: If you consider a public company that has, say, a $50 million public float and negligible revenues, and you impose on that company the full set of disclosure requirements, which could mean millions in annual compliance costs, the company could reasonably determine that it’s not worth being public under those conditions. (And, similarly, smaller private companies could determine that it’s not worth going public.) Accordingly, the SEC allows relaxed disclosure for these companies, even though there is not much available outside reliable information about them. The investing public should, therefore, be wary about investing in these companies, unless they or their advisors are knowledgeable about the particular companies and their industries.

Press Coverage

"Andrew Abramowitz, a lawyer in Manhattan who has worked with both buyers and sellers of private placements, said every investor should approach a private placement skeptically." -- Paul Sullivan (New York Times)

"If the goal [...] is to protect people from losing all of their money in an illiquid investment, the current standard fails on that count, too. Andrew Abramowitz, a lawyer in Manhattan who has worked with both buyers and sellers of private placements, said a better standard might be to limit how much of their net worth people can invest." -- Paul Sullivan (New York Times)